I have fielded several inquiries lately about a lawyer’s
responsibility for client funds held in trust in the event the bank becomes
insolvent. Oregon lawyers are not the only ones concerned; the issue was
also the topic of a recent e-mail discussion on a list serve for lawyers
throughout the country who defend disciplinary and malpractice claims against
other lawyers.

While it is hoped that the collapse of
IndyMac and a handful of small banks are isolated incidents,
none of us can predict the future, and few of us have
any inside information into the health of the banks
we choose for our lawyer trust accounts. Accordingly,
it is incumbent on lawyers, as fiduciaries for their
client funds, not only to comply with the rules of
professional conduct regarding trust accounts but also
to understand how deposit insurance will or will not
protect client funds.

The title of RPC 1.15-1 describes the
lawyer’s obligation in a nutshell: Safekeeping
Property. Paragraph (a) of the rule requires first
that lawyers keep client funds1 in their
possession separate from the lawyer’s own funds.
It also requires that client funds be held in an account
denominated as a "Lawyer Trust Account," signifying
that the lawyer holds the funds in trust for the clients.
The lawyer trust account must be an interest-bearing
account in a financial institution selected by the
lawyer or law firm "in the exercise of reasonable
care."

RPC 1.15-2(h) permits lawyers to have
trust accounts only in institutions that are authorized
by state or federal banking law to transact business
in the jurisdiction where the account is located (which
must be the jurisdiction in which the lawyer’s
office is situated). The institution must be insured
by the Federal Deposit Insurance Corporation.2

The FDIC insures deposit accounts in
an institution up to $100,000 per depositor. Funds
in a fiduciary account, including a lawyer trust account,
are insured as the funds of the actual owner (the client)
to the same extent as if deposited by the actual owner
rather than the fiduciary, provided:

The fiduciary nature of the account is
disclosed in the account title and

The identities and interests of the clients
can be ascertained from records maintained in the regular
course of business by the depositor (the lawyer or
law firm).

If the account is in compliance with
RPC 1.15-1(a), the fiduciary nature of the account
will be disclosed in the account title, i.e., "Perry
Mason Lawyer Trust Account." If Perry maintains
complete records regarding the funds in the account
as required by RPC 1.15-1(a), the identity and interest
of each client can be ascertained, and each client’s
funds will be insured up to the limit.

Because the FDIC treats the deposits
in a lawyer trust account as the accounts of the individual
clients, the client’s insurance is applied to
the aggregate of the client’s funds in the institution.
Thus, if a client has $60,000 in a lawyer trust account
in the bank and $60,000 in a personal account in the
same bank, the client’s insurance is capped at
$100,000, leaving $20,000 uninsured.

The scope of a lawyer’s responsibility
for client funds lost in a bank failure is not entirely
clear. As mentioned above, the Oregon Rules of Professional
Responsibility require only that lawyers exercise reasonable
care in selecting a financial institution for their
lawyer trust accounts and that the institutions be
federally insured. Nothing in the rule can be read
as a mandate that the lawyer allocate funds between
multiple institutions to assure that each client’s
funds are fully protected by deposit insurance.3

Rules like Oregon RPC 1.15-1 (and ABA
Model Rule 1.15 on which it is patterned) reflect and
adopt as the standard of professional conduct a fiduciary’s
traditional duties regarding funds of another: segregation,
notification, delivery and accounting. While the rules
require lawyers to be prudent in their handling of
client funds, they don’t require lawyers to be
able to predict the future of the banks they select
for client trust accounts.

There are no disciplinary cases suggesting
that proper safeguarding of client funds includes assuring
the funds are fully insured. There is at least one
case in which a court has held that lawyers are not
civilly liable for a client’s losses resulting
from a bank failure. In Bazinet v. Kluge, 788
NYS 2d 77, 14 AD3d 324 (2005), an attorney had acted
as an escrow agent for his client in a real estate
transaction and deposited over $1 million of earnest
money into his firm’s trust account at the Connecticut
Bank of Commerce. Before the transactions could be
concluded, the bank was taken into receivership by
the FDIC. When the client was able to recover only
about 1/3 of the money from the FDIC, she sued her
attorney, alleging it was malpractice for him not to
have deposited the funds in a manner that would have
been fully covered by the FDIC insurance. The court
dismissed her claim because there was no allegation
that the attorney had violated any statute or regulation
and the New York rules governing lawyer trust account
did not require that the funds be placed in accounts
fully insured by the FDIC. Moreover, there was no allegation
that the lawyer knew that the bank was in danger of
closing. The proximate cause of the client’s
injury, held the court, was the bank’s "unforeseen
demise."

Of course, if bank failures become a
more widespread occurrence, civil courts and disciplinary
authorities might adopt a stricter view of what constitutes
prudence and "reasonable care." In the meantime,
lawyers may wish to remind clients of the $100,000
insurance limit on any individual’s funds in
a single institution so the client can take appropriate
steps to protect amounts that may exceed the aggregate
insurance limit. This will necessarily include informing
the client of the location of the lawyer trust account,
e.g.: "$100,000 of your funds at [fill in the
blank bank] are fully insured by the FDIC; The $15,000
I am holding in trust for you counts towards that maximum
at [name the institution]; if you have additional funds
in the same institution approaching or exceeding the
insurable limit, you may wish to make other arrangements
so that all of your deposits there will remain insured." Also,
if a lawyer is holding more than $100,000 in trust
for any one client, the lawyer should consider dividing
the funds into accounts at different financial institutions
to maximize the client’s deposit insurance. Periodic
inquiries into the health of one’s bank might
also be prudent.

Finally, proper accounting of client
funds in trust is crucial to the ability to ascertain
the amount of funds belonging to each client in the
event a claim must be made for FDIC insurance At the
very least, that means identifying the client on whose
behalf each deposit or withdrawal is made and regularly
reconciling the balance belonging to each client. Practitioners
desiring help with the practical aspects of trust accounting
are encouraged to contact the PLF’s Practice
Management Advisors at (503) 639-6191.

Endnotes:

1. The rule also applies to funds of third persons;
for purposes of discussion here, "client
funds" encompasses all funds of others held by
the lawyer.

2. The rule permits lawyer trust accounts in institutions
insured by "an analogous federal government agency," but
as a practical matter most trust accounts are simple
deposit accounts insured by the FDIC. The authority
for holding client funds in brokerage or other accounts
and the applicable insurance protection are beyond
the scope of this article.

3. Oregon’s rules on trust accounts differ
significantly from the ABA Model Rules, which do not
require that the account be titled "Lawyer Trust
Account," that the lawyer exercise reasonable
care in selecting the account, or that accounts be
in federally insured institutions. Moreover, in most
jurisdictions, the details of how IOLTA and other trust
accounts are maintained are not in the RPCs at all,
but in stand-alone court rules. There is considerable
variation among the jurisdictions in the details of
trust accounting.

ABOUT THE AUTHORSylvia Stevens is general counsel for the Oregon State
Bar. She can be reached at (503) 620-0222, or toll-free
in Oregon at (800) 452-8260, ext. 359, or by e-mail
at sstevens@osbar.org.